Bond fund manager: Beware Treasuries

Investors flock to Treasury bonds because they are backed by the U.S. government. But one bond fund manager doesn't think they are great buys anymore.

Treasuries are often considered the safest investment in the world, but they could ultimately be one of the more dangerous places to put a large chunk of your portfolio.

Bond fund manager Bill Gurtin is worried about what he calls Fed-induced complacency that is causing investors around the world to pile into Treasuries. These moves have driven up prices in U.S. government bonds and sent yields near all-time lows.

"We've been in a 30-year uninterrupted bull market in bonds," said Gurtin, the CEO of Gurtin Fixed Income, which manages $6.5 billion. "Returns like that are unsustainable."

Yields on 10-year Treasuries have dropped to under 2% from 16% in 1981. There's a limit to how much higher prices can move and how much lower yields will fall, Gurtin said to an audience at the Stocktoberfest investing conference in San Diego last week hosted by social investing site StockTwits.

"We're all complacent about what the Fed is doing," said Gurtin. "People have jumped aboard QE3 feeling like it's a pretty smooth trip, but there's no port ... for this huge boat to land on."

Gurtin stopped short of calling the U.S. government bond market a bubble. But he said Treasuries are trading at levels that are not based on fundamentals. Excessive bond buying by the Federal Reserve and China are fueling ultra low interest rates, and they ultimately will turn the other way.

For that reason, there's a danger lurking in nearly everyone's portfolio, because bond prices can drop precipitously when the Fed curtails its buying of bonds, said Gurtin. "People don't understand what they own."

Still, Gurtin admitted that he doesn't know exactly when interest rates will turn higher. "I only know that we're closer than we've ever been," he said.

Investors have been spooked by a small number of bankruptcies that have caused cities to default on their bonds. But Gurtin said Meredith Whitney's 2011 prediction of an imminent crisis in munis is a bit alarmist. He still thinks investors can get much more for their money in munis, adding that state-backed municipal bonds are nearly as safe as Treasuries but offer significantly more yield. Unlike cities, states are nearly immune from the possibility of defaulting.

Maureen Farrell is a staff writer at CNNMoney and covers Wall Street, banking, mergers and the stock and bond markets. Prior to joining CNNMoney, she covered venture capital and entrepreneurs for Forbes, and mergers and bankruptcy for Mergermarket and Debtwire, both divisions of the Financial Times.